“We Were Just Getting Paid What We Were Owed”: Why That Is Not Always a Defence Understanding unfair preference claims by liquidators and the lessons from Bryant v Badenoch

“We Were Just Getting Paid What We Were Owed”: Why That Is Not Always a Defence Understanding unfair preference claims by liquidators and the lessons from Bryant v Badenoch

“We were just getting paid what we were owed.”

It is one of the most common responses raised when a company director or supplier receives a letter of demand from a liquidator seeking repayment of funds received before a company collapsed.

By the time litigation is on foot, businesses are often surprised to learn that receiving a legitimate payment, for a genuine debt, owed under a valid invoice, can still be clawed back by a liquidator months or even years later.

How far back a liquidator can look depends on the type of claim:

• unfair preference claims: 6 months before the "relation-back day" (usually the date the winding up application was filed);
• uncommercial transactions: 2 years before the relation-back day (extended to 4 years where the other party was a related entity of the company, or up to 10 years where the transaction was entered into with the intention of defeating creditors); and
• director-related transactions: 4 years before the relation-back day, where the payment was made to a director or their close associate.

You Can Be Paid Correctly and Still Have to Pay It Back

Many creditors assume that once a debt is paid, the matter is closed. If the invoice was genuine and the payment matched the amount owed, there is nothing left to dispute.

That is not necessarily the case.

Under the Corporations Act 2001 (Cth), a liquidator can seek to recover payments made by an insolvent company in the period before it entered external administration, even where the underlying debt was entirely legitimate. These are known as unfair preference claims, and they exist to ensure that all unsecured creditors share rateably in what is left of an insolvent company, rather than the party who happened to be paid first, or paid loudest, walking away better off than everyone else.

The High Court's decision in Bryant v Badenoch Integrated Logging Pty Ltd [2023] HCA 2 confirmed how these claims are assessed, clarifying how running account arrangements and the “peak indebtedness” method interact when a liquidator calculates the amount said to constitute an unfair preference. In broad terms, the "peak indebtedness" method allows a liquidator to select the date within the relevant period when the debtor owed the creditor the most, and calculate the preference by reference to the net reduction in that debt between that peak and the last payment received, rather than by reference to the first payment in the period. This can significantly increase the amount a liquidator claims to recover. The decision has significant implications for any business that continued supplying goods or services to a customer while that customer's financial position was deteriorating.

The case is a reminder that being paid does not always mean being safe.

Why This Becomes a Litigation Issue

Preference claims typically surface long after the underlying commercial relationship has ended, often when a business has already moved on and assumes the matter is finished.

Problems usually arise when:

• a customer or debtor company enters liquidation within the relevant statutory period;
• payments were made while the company was insolvent or trending toward insolvency;
• a supplier continued extending credit or accepting payments on a running account (that is, an ongoing series of transactions between the same parties treated as one continuous account, rather than as separate, isolated payments);
• security or personal guarantees were relied upon without proper review; or
• records of the trading relationship are incomplete or difficult to reconstruct.

From a commercial litigation perspective, we regularly see disputes involving:

• unfair preference claims brought by liquidators against suppliers and trade creditors;
• disputes over whether a running account existed and how it should be characterised;
• challenges to the “peak indebtedness” calculation used to quantify a claim;
• the “good faith” and “no reasonable grounds to suspect insolvency” defences under section 588FG; and
• related director and insolvent trading exposure arising from the same collapse.

In many of these matters, the outcome turns on one critical question: what did the creditor know, or ought reasonably to have suspected, about the debtor's financial position at the time payment was received?

The Commercial Risk for Businesses

Preference claims can arrive well after a business has stopped thinking about a customer relationship, and they can be expensive to resist without early, well-organised evidence.

Businesses may face:

• demands to repay amounts received months, or up to several years, earlier;
• the burden of reconstructing historical trading records and payment terms;
• disputes over how a running account should be treated and calculated;
• prolonged correspondence and negotiation with a liquidator before any resolution; and
• legal costs that escalate quickly once formal proceedings are commenced.

Even where a defence is ultimately available, a poorly documented trading relationship makes resisting a preference claim slower, costlier and more uncertain than it needs to be.

The Good News: Much of This Risk Is Manageable

Businesses do not need to abandon credit trading or running accounts to protect themselves.

However, they do need good records and an early response.

Simple steps can significantly reduce exposure:

• maintain clear records of invoices, payment terms and correspondence with each customer;
• monitor customers for signs of financial distress, such as requests to extend terms or partial payments;
• respond promptly and seek advice as soon as a liquidator's demand or preference claim is received;
• understand the statutory defences available, including the good faith defence; and
• avoid ignoring early correspondence in the hope that a claim will not proceed.

The Takeaway

Getting paid is not the end of the story.

When a customer later collapses, a liquidator can look back at that payment and ask whether it unfairly advantaged one creditor over the rest. Courts assessing these claims do not rely on assumptions about fairness. They apply the statutory framework, as clarified in Bryant v Badenoch, to the facts and records actually available.

If this article raises any questions about a preference claim, a liquidator's demand, or your trading arrangements with an insolvent counterparty, our Litigation Team would be pleased to assist.